Dragon herds the paper tigers

Chinese diplomats toasted another success for their decade-long campaign in Southeast Asia on July 27 after Cambodian legislators approved a state guarantee promising handsome profits for a US$280 million hydro-power project by Sino-Hydropower.

That such an assurance was forthcoming reflects China’s influence in Cambodia, all the more remarkable given that Beijing supported the government of King Norodom Sihanouk in the 1960s, the Khmer Rouge in the 1970s and 1980s, and now their usurper, Hun Sen, a Vietnamese-backed communist.

Bundles of yuan are funding roads, bridges and teachers for schools for 700,000 Cambodian Chinese, mainly Teochew. In turn, this strong political and cultural relationship gives people from across China confidence to invest time and money in Cambodia. Just how many is uncertain; estimates range from 50,000 to 300,000.

Experience gained as China’s economy shifts from communist economics to something like capitalism gives Chinese an eye for an opportunity, encouraging bets on Cambodia, one of Southeast Asia’s most open economies. Low costs, flexible officials, easy tax evasion, and no controls on exchange make Cambodia something of a promised land, one with fertile soils, minerals and oil, gas and coal.

Outward momentum

China’s commercial push into the country gathered steam in the late 1990s, led by a handful of large firms, mostly state-owned. Some fared well, others not. Though the private sector accounts for most Chinese projects and people in Cambodia, large firms have not abandoned the kingdom.

Huawei is building a CDMA mobile network for Cambodian villages where few, if any, phone or Internet connections exist. China National Offshore Oil Corp is expected to win at least one of Cambodia’s five promising offshore oil blocks. An oil refinery is planned for Sihanoukville, the country’s largest port, by Xinjiang-based 777 Oil Refinery.

Cambodia is not alone in drawing investors and workers from China. They are seeping across Southeast Asia in the largest wave of migration since the tumultuous decades of the 19th and early 20th centuries. Borders between China and its neighbors are wide open, because of policy, thin budgets and palms-up cooperation. In return, Southeast Asia is building a trade surplus that should see China displace America as the region’s biggest market by 2008.

Chinese are flowing into Laos along roads laid by Chinese construction firms. Every sizeable Laotian town now has a Chinese market, selling all the snazzy clothing, DVDs and consumer electronics that pour out of China’s over-invested factories. Such goods until a few years ago came mostly from Thailand, or perhaps Vietnam, if at all. Thai products, often pricier, usually win on quality, though that advantage is slowly eroding.

In early August, Chinese investor Ting Kua Chiang announced an US$18 million Lao-Chinese Friendship Trade Center, shopping and hotel complex for Chinese businesspeople and visitors in Vientiane.

A commercial center is planned for Luang Nam Tha, a one-pier town near the Chinese border, which has become a quarter Chinese in recent years. In the hills around Luang Nam Tha highlanders are growing less and less rice, risking hunger for the ups and downs of contracts with Chinese merchants for California-bound bananas and mainland-headed rubber.

This is certainly just the beginning. Rich mineral deposits and steep valleys ideal for hydroelectric power stations are also likely to be targeted by Chinese investors. Their efforts will be backed by a hard-working diplomatic corps, which is driving a wedge of influence into what was until even the late 1990s Vietnam’s private party.

Their grandest gift is the stout Lao National Culture Hall, one of the largest government buildings in Vientiane.

Burmese promise

However, it is outcast Burma that harbors the greatest potential, cutting shipping times and costs between inland China and the markets of India, the Middle East and Europe, not to mention Arab oil fields and African mines.

Plans for Ruili, a dusty town thriving on heroin, sex and gambling in Yunnan Province, a stone’s throw from the Burmese border, signal Beijing’s intentions. One of seven new national highways announced in early 2005 will connect Beijing with Ruili, while a rail link with Kunming is due in 2008. From Ruili it is only a few hours into Burma and the Lashio railhead.

Meanwhile Chinese migrants are pushing deeper into Burma, a common sight on streets as far south as the Shan States and Mandalay, opening shops, trading firms and contracting farmers to grow food for export to China. Investors are building a special economic zone in Rangoon port and a deepwater port at Sittwe, near undersea gas fields that should be supplying Kunming via pipeline by 2010.

China’s moves in Burma, Cambodia and Laos are making their paper tiger economies stronger so trouble is less likely along its southeastern border, echoing America’s strategy to pump money into nasty right-wing dictatorships at risk from communist guerrillas during the Cold War.

Beijing’s strategy in these countries, and indeed across Southeast Asia, is not so much the machinations of a new power as the return of a power long absent, arguably since the 15th century.

Whether China accepts the status quo, and other players accept its interests, will determine the region’s future.

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China Economic Review (CER) has been a dependably independent voice on trends and developments in the greater Chinese economy for a quarter century. Our coverage has won recognition from the Society of Publishers in Asia and is widely read by economists, business leaders, academics and students with an interest in one of the world’s most vibrant and complex developing markets.